Cap Rate vs IRR: What Each Number Measures in an Apartment Deal
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A cap rate is one year of net operating income divided by the price: a snapshot of what the building would yield in a year if bought for cash. An IRR (internal rate of return) is the yearly return over the whole investment, counting every cash flow in and out: the purchase, each year's income, the loan, and the sale. The two are linked. When a building is bought and sold at the same cap rate, its unlevered IRR is roughly the cap rate plus the yearly NOI growth, less costs: in the example below, a 6.0% cap rate with 3% growth gives an unlevered IRR of about 8.6%. A sponsor's projected investor IRR adds the effect of the loan, fees and the waterfall on top.
This post is part of our guide to real estate syndication. It explains what each number tells you and how to read them together. Figures are as of November 2026 and the example is illustrative.
Side by side
| Question | Cap rate | IRR |
|---|---|---|
| Time period | One year | The whole hold |
| Includes the loan? | No | Levered IRR does; unlevered IRR does not |
| Includes the sale? | No | Yes |
| Includes growth? | No | Yes |
| Includes fees and the waterfall? | No | Investor (LP) net IRR does |
| Main use | Pricing a building against the market | Comparing investments with different timing |
A worked example
A building is bought for $10,000,000 at a 6.0% cap rate ($600,000 of NOI). NOI grows 3% a year and the building sells after 5 years, priced on year-6 (the next year's) NOI at the exit cap rate, with 2% selling costs. All cash, no loan. The figures are an example.
| Exit cap rate | Unlevered IRR |
|---|---|
| 6.0% (same as going in) | 8.63% |
| 6.5% | 7.19% |
| 7.0% | 5.88% |
With an unchanged cap rate, the IRR is a little under 6% + 3% = 9%, because of the selling costs. A half-point higher exit cap rate takes about 1.4 points off the IRR. That is why the exit cap rate matters so much; see cap rate compression and expansion and the exit cap rate assumption.
Add a loan and the IRR changes again, up when the unlevered IRR beats the cost of debt and down when it does not; see equity multiple, IRR and cash-on-cash.
Why can a low cap rate deal still show a high IRR?
Because the IRR depends on what happens after year 1. A low going-in cap rate can produce a high projected IRR if the model assumes:
- Fast NOI growth, from renovations or rent increases. See rent growth assumptions.
- A low exit cap rate, close to or below the going-in rate.
- High leverage on cheap debt.
Each can be reasonable or not. The question for an investor is which of them carries the projected IRR, and what happens if it does not arrive.
How to read the two together
- Start with the cap rate on tax-adjusted trailing NOI. It tells you what you are paying for today's income. See what is a good cap rate.
- Look at the unlevered IRR. If it is far above the cap rate plus a realistic growth rate, find the assumption doing the work.
- Then the levered and investor IRR. Ask how much each layer, the loan, fees and the waterfall, adds or takes away. See the syndication waterfall.
- Check the downside. The IRR at a higher exit cap rate and slower growth. See sensitivity analysis.
Projected IRRs are estimates, not promises, and every investment can lose money.
How DoorRaise fits in
DoorRaise helps sponsors raise equity for apartment buildings with 5 or more units from their friends and followers. The deal page shows projected returns that DoorRaise computes from the sponsor's inputs, after DoorRaise's fees. DoorRaise forms the deal's LLC, prepares the offering documents, files Form D and verifies every investor's accreditation, in 506(b) and 506(c) deals. Investors fund by wire into escrow at Enterprise Bank & Trust, and distributions are quarterly by default. DoorRaise charges two flat fees: $1,500 to set up (non-refundable) and $5,000 a year for administration, the first year paid at closing from the money raised and only if the deal closes.
Before you invest, use the free list of questions to ask a sponsor.
FAQ
What is the difference between cap rate and IRR?
The cap rate is one year of NOI divided by price, with no loan and no sale. The IRR is the yearly return over the whole hold, including growth, the loan if levered, and the sale.
Is a higher cap rate better than a higher IRR?
They measure different things. A higher cap rate means more income for the price today; a higher IRR means a higher projected return over time, which depends on assumptions about growth and the sale.
How are cap rate and IRR related?
When the exit cap rate equals the going-in cap rate, the unlevered IRR is roughly the cap rate plus the yearly NOI growth, less transaction costs.
Why is the IRR higher than the cap rate?
Usually because of NOI growth, leverage on debt that costs less than the property returns, or an assumed lower exit cap rate. Each adds risk.
Should I compare deals by cap rate or IRR?
Use both. The cap rate shows what you pay for current income; the IRR, on the same basis for each deal, shows the projected total return and its timing.
Sources
- SEC, Investor.gov: investor bulletin on private placements under Regulation D
- Fannie Mae Multifamily Selling and Servicing Guide
This article is general information, not legal, tax or investment advice. The example building and returns are illustrative and not a projection for any deal. DoorRaise is not a lender, law firm, broker-dealer, investment adviser or funding portal.